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What is a Balanced Scorecard?

The Balanced Scorecard (BSC) is a strategic performance management framework that allows organisations to manage and measure the delivery of their strategy. The concept was initially introduced by Robert Kaplan and David Norton in a Harvard Business Review Article in 1992 and has since then been voted one of the most influential business ideas of the past 75 years.

Like most good ideas, the concept of the Balanced Scorecard is very simple. Kaplan and Norton identified four generic perspectives that cover the main strategic focus areas of a company. The idea was to use this model as a template for designing objectives and measures in each of the following perspectives.

Balanced Scorecard

Balanced Scorecard Perspectives y y y y The Financial Perspective covers the financial objectives of an organisation and allows managers to track financial success and shareholder value. The Customer Perspective covers the customer objectives such as customer satisfaction, market share goals as well as product and service attributes. The Internal Process Perspective covers internal operational goals and outlines the key processes necessary to deliver the customer objectives. The Learning and Growth Perspective covers the intangible drivers of future success such as human capital, organisational capital and information capital including skills, training, organisational culture, leadership, systems and databases.

From Measurement Dashboards to Strategy Maps When it was first introduced the Balanced Scorecard perspectives were presented in a four-box model (see Figure 1). Early adopters created Balanced Scorecards that were primarily used as improved performance measurement systems and many organisations produced management dashboards to provide a more comprehensive at a glance view of key performance indicators in these four perspectives. However, this four box model has now been superseded by a Strategy Map (see Figure 2 for the generic template), which is the heart of modern Balanced Scorecards. A Strategy Map places the four perspectives in relation to each other to show that the objectives support each other. Cause-and-Effect Logic A Strategy Map highlights that delivering the right performance in the one perspective (e.g. financial success) can only be achieved by delivering the objectives in the other perspectives (e.g. delivering what customers want). You basically create a map of interlinked objectives. For example: y y y The objectives in the Learning and Growth Perspective (e.g. developing the right competencies) underpin the objectives in the Internal Process Perspective (e.g. delivering high quality business processes). The objectives in the Internal Process Perspective (e.g. delivering high quality business processes) underpin the objectives in the Customer Perspectives (e.g. gaining market share and repeat business). Delivering the customer objectives should then lead to the achievement of the financial objectives in the Financial Perspective.

Strategy maps therefore outline what an organisations wants to accomplish (financial and customer objectives) and how it plans to accomplish it (internal process and learning and growth objectives). This cause-and-effect logic is one of the most important elements of best-practice Balanced Scorecards. It allows companies to create a truly integrated set of strategic objectives. For best practice examples please visit our case study section. The danger with the initial four-box model was that companies can easily create a number of objectives and measures for each perspective without ever linking them. This can lead to silo activities as well as a strategy that is not cohesive or integrated.

How many companies use the Balanced Scorecard? About half of major companies in the US, Europe and Asia are using Balanced Scorecard approaches. The official figures vary slightly but the Gartner Group suggests that over 50% of large US firms have adopted the BSC. A study by Bain & Co finds that about 44% of organisations in North America use the BSC and a study in Germany, Switzerland, and Austria finds that 26% of firms use BSCs. The widest use of the BSC approach can be found in the US, the UK, Northern Europe and Japan.

What are the Key Benefits of using Balanced Scorecards? Research has shown that organisations that use a Balanced Scorecard approach tend to outperform organisations without a formal approach to strategic performance management. The key benefits of using a BSC include: 1. Better Strategic Planning The Balanced Scorecard provides a powerful framework for building and

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communicating strategy. The business model is visualised in a Strategy Map which forces managers to think about cause-and-effect relationships. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance (such as the intangibles) are identified to create a complete picture of the strategy. Improved Strategy Communication & Execution The fact that the strategy with all its interrelated objectives is mapped on one piece of paper allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This plan on a page facilities the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of strategy. In the end it is impossible to execute a strategy that is not understood by everybody. Better Management Information The Balanced Scorecard approach forces organisations to design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and gain increasing benefits from the way this information is used to guide management and decision making. Improved Performance Reporting companies using a Balanced Scorecard approach tend to produce better performance reports than organisations without such a structured approach to performance management. Increasing needs and requirements for transparency can be met if companies create meaningful management reports and dashboards to communicate performance both internally and externally. Better Strategic Alignment organisations with a Balanced Scorecard are able to better align their organisation with the strategic objectives. In order to execute a plan well, organisations need to ensure that all business and support units are working towards the same goals. Cascading the Balanced Scorecard into those units will help to achieve that and link strategy to operations. Better Organisational Alignment well implemented Balanced Scorecards also help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organisation.

These are compelling benefits; however, they wont be realised if the Balanced Scorecard is implemented half-heartedly or if too many short cuts are taken during the implementation. For a more in-depth discussion of the main pitfalls please read the API white paper What is a Balanced Scorecard'.